Capacity Utilization Rate Formula

Investors and management always want to make their company financially strong institution. In order to make institution financially strong, operational efficiency need to improve to save cost and to raise the revenue and profit. So as an analyst or management or investor it becomes imperative to study operation efficiency of the company.

And the maximum possible output a firm can produce in a given period of time.

Capacity utilization rate is a ratio which is used to calculate the rate at which maximum capacity or output levels are being manufactured or used. The capacity utilization rate is displayed as a percentage figure and it can give a proper insight into the estimation capability of the management and the general negligence about the capacity addition by the organization is at a point of time. Capacity utilization rate is sometimes also called an operating rate of the plant or company.

Capacity utilization rate also helps in finding the economics of scales or diseconomy of scale It also helps in finding out the breakeven of the company and the level at which piece costs per unit will rise. Capacity utilization is generally used in manufacturing companies that manufacture physical products instead of providing services as it is easy to quantify physical goods.

For instance, if we look at a manufacturing firm for a financial year, we should be able to find how much the firm has produced during the financial year; and then we can check how much the firm can actually produce. Comparing these two components will give us a hint about how much capacity the firm has utilized during the financial year.

Examples and Explanation of Capacity Utilization Rate Formula

XYZ company can produce 80,000 toys during a financial year. During the last financial year of 2016, they could only produce 60,000 toys due to the absence of labors. Find out the capacity utilization of XYZ company.

As we already know the actual output of XYZ company during the last financial year of 2016, i.e. 60,000 toys. The potential output is 80,000 toys.

From the above, we can also find out the slack of XYZ company during the last financial year of 2016.

Slack = (100 % – 75 %)

Slack = 25 %

If the capacity utilization rate of a firm is less than 100 %, then the firm can increase its production from the current level of production till the point capacity reaches 100 %.

If we look at it from a different point of view, we will find that this utilization rate shows how much slack in production a firm is doing at a particular time period.

For instance, if we see that the capacity utilization rate is 75% of a company in a given financial year, then we would also be able to find how much the firm couldn’t utilize during that particular financial year. The percentage of capacity that the firm couldn’t utilize during the period is called “slack”. In the above-mentioned example, the slack of the firm during the financial year is = (100 % – 75 %) = 25 %.

Significance and Use of Capacity Utilization Rate Formula

To understand the application of capacity utilization rate, we need to take an example.

From the above example, it is clear that capacity utilization shows a clear picture of the operational efficiency of the firm. Higher the utilization rate, higher will be the operational efficiency of the firm.

Even capacity utilization rate has a great effect on the economic policies of the company. When policymakers make economic policies, they look at a capacity utilization of the frim to figure out how to stimulate the utilization of capacity in the overall economy.

Capacity Utilization Rate Calculator

You can use the following Capacity Utilization Rate Calculator

Actual Profit

Maximum Possible Output

Capacity Utilization Rate Formula

Capacity Utilization Rate Formula

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Actual Profit

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Maximum Possible Output

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100

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Capacity Utilization Rate Formula in Excel (With Excel Template)

Here we will do the same example of the Capacity Utilization Rate formula in Excel. It is very easy and simple. You need to provide the two inputs actual output and Maximum possible output

You can easily calculate the Capacity Utilization Rate using Formula in the template provided.

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